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Endogenous Monetary Commitment

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Author Info
Jan Libich ()
Petr Stehlik

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Abstract

The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of commitment, as well as its endogenous deter- mination. Our main policy contribution consists in showing that the socially optimal degree of long-term monetary commitment depends on: (i) the potential short-term cost in terms of reduced stabilization flexibility, (ii) the potential benefi?t in terms of better anchored expectations, (iii) the structure of the economy, (iv) agents' expectations for- mation, and (v) the degrees of the central bank's conservatism (strictness) and ambition. The latter point implies substitutability between explicit inflation targeting and central bank goal-independence, and offers a possible explanation for the fact that countries with originally low degrees of central bank goal-independence have tended to commit more explicitly to price stability (legislate a unitary or hierarchical mandate rather than a dual mandate).

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Publisher Info
Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2009-01.

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Length: 16 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:acb:camaaa:2009-01

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Related research
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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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This page was last updated on 2009-11-6.

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